TOPIC: Top 10 Film Industry Stories of 2011: #10

A few years ago when the Sony Playstation 3 and Microsoft Xbox 360 were approaching launch, a few of the savvier media analysts included evaluations of the Trojan horse aspect of their releases. While Sony and Microsoft shared the desire to win the videogame hardware battle, their laser focus was directed at something else. The last generation of console wars was all about living room dominion.

Not coincidentally, the lone device built exclusively for videogames, the Nintendo Wii, wound up winning the war in terms of software and hardware sales. Over the past year, however, the ascension and near-immediate ubiquity of apps has revealed that Sony and Microsoft were looking in the right direction. What has become readily apparent in that timeframe is that the way we as a people consume media has been fundamentally altered.

I am old enough to remember a time before cable television. Many of BOP’s readers are not old enough to remember a time before the Internet. Ten years from now, some readers of this list will not remember a time before apps. These statements exemplify the constantly evolving nature of consumer behavior with regards to media. In thirty short years, we went from an era where television programming ended at 2 a.m. and phones had rotary dials and cords to one in which we can watch real time news stories from our cell phone.

The impending fallout from this makes the movie theater the dinosaur with the app representing an Earth-bound comet. Everyone in the movie industry recognizes that the fate of the drive-in movie theater is the same one awaiting the IMAX Cineplex in coming years. We are gradually but routinely moving away from theatrical media consumption. This is the way of things.

Each year, we grow closer to that eventuality. In 2011, there were two moments that embodied this. The first involved the release of Tower Heist, a Ben Stiller/Eddie Murphy buddy comedy intended to be an Ocean’s 11-flavored star power vehicle. Universal Pictures experienced a media maelstrom when they announced the intention to distribute the film on Comcast Video on Demand three weeks after its theatrical debut. The intent in this action is obvious. Universal wanted to test the already brief window between a movie’s theatrical and home video release windows.

In evaluating the situation, the idea seems innately flawed. Tower Heist would be available in the home as a rental, not a purchase, at the opposite of low, low price of $59.99. That’s roughly what tickets would cost for a group of five friends (national ticket average maintains it is the equivalent of eight, but I want to be realistic in the evaluation) to watch Tower Heist at a theater. This is like me saying that I will sell you my television for $10,000 because I will…if you are foolish enough to pay that for it. Don’t get me wrong. I love my television but it costs about $1,200 at Amazon. I would be looking at a lot of profit if you bought it for that. In a nutshell, this is how Universal Pictures was marketing their VOD trial.

The two primary movie theater chains, Regal Enterainment Group and AMC Entertainment Inc., expressed their displeasure with the decision. The third largest theater chain, Cinemark Theatres, escalated the situation by refusing to exhibit Tower Heist AT ALL if it were made available on VOD three weeks after its debut. This hard line stance caused Universal to blink, as the distributor disavowed its VOD plans.

A cursory examination of the standoff reveals a gross overreaction by the major theater chains to a business model that was never going to work. And let’s be honest about the fact that Tower Heist is nothing more than a modest hit at best that has earned $76.0 million domestically and about $126 million worldwide against a pricey $85 million production budget. This misses the point, though.

What the major movie exhibitors balked at happening is for the first major step to be taken on this road to their obsolescence. After Universal had done it, Disney and Sony could have followed in their steps, arguing that nobody cared when Tower Heist was available so quickly on VOD. It would have quickly become prototypical behavior and a price drop would have come soon afterward that gave a consumer a true choice between going out to a theater as opposed to staying home and watching the same movie for roughly the same price. This is the tipping point that keeps exhibitors up at night.

We have frequently discussed the manner through which exhibitors and distributors divide revenue. There is a split that heavily favors the distributor at the start but eventually becomes a nearly equal split in the latter weeks of a movie’s theatrical run. Quicker availability on home video changes the revenue split to cable providers selling VOD and major retailers such as Wal-Mart and Amazon. But there is a previously unforeseen option on the horizon. Through the usage of apps, the digital rights to a product may be rented and/or sold directly from the content creator to the consumer sans the middleman. THIS is where the true profit exists. A movie studio keeps 100% of the cut and in doing so, they maximize profit in historically unprecedented fashion.

As BOP has always noted, the reason why exhibitors have little leverage in negotiating with movie distributors is that without this product, movie theaters are empty stadiums with empty screens. To wit, nobody pays money to go to a football stadium unless there is a game being played there. Movie theaters exist in the same manner. They need product to lure customers whom they can then upsell on exorbitantly overpriced popcorn and beverages. So, they cut deals and share revenue in exchange for the privilege of licensing the content. The content creators have availed themselves of this methodology in the past because it was the most lucrative proposition.

With the attempt to shrink the theatrical release window of Tower Heist, Universal Pictures attempted to alter the fundamental behavior of the accepted release pattern. In taking that step, they wanted to neutralize any remaining pull from movie exhibitors while enhancing an existing revenue model. This would have placed the corporation squarely on the path toward a zero revenue sharing movie business model. They were stymied in the attempt. But in the words of Agent Smith, what the exhibitors heard was the sound of inevitability. Hallmark change is in the offing even as worldwide revenue is at an all-time high.